Building a Passive Income Portfolio

Months before Jack Bogle passed away, he surprised many by saying in the next decade, he was expecting a 4% yearly return in the stock market and a 3.5% in the bond market.  Since then I've been hearing repetitions of this prediction of low single digit market returns regularly on CNBC and from hedge fund managers. Morgan Stanley has reiterated a market return 4.1% for the next decade.  Instead of trusting growth equities to provide payout going forward, I'm shifting to the more reliable payments of fixed income.  Like any lazy investor with passive income dreams, I want to live off perpetually generating dividend income.  The hard part is assessing how much unwanted risk will I swallow for the crumbs of yield in the last throes of a long cheap money credit cycle that is at heightened risk of imploding.

You're gonna get punched in this erratic risk-on
risk-off environment.  Just make sure you get paid.

The last decade has been hugely punishing to savers in the U.S. but at least we did not have negative interest rates like Europe even if inflation did dip real interest rates negative. This trend of lower for longer may not reverse any time soon given the yearly federal deficit growing past trillion and declining GDP with aging boomer demographics.  Because the bank interest rate is below 1.5%, I have to work much harder to scrape yield in this stingy market.

Risks - Sector Rotation/Credit Bubble
Fixed income opens you up to the usual credit and interest risk along with duration risk. Credit risk is something to watch out for at the end of a long credit and economic cycle so I opt for quality and "limit" junk to absolute minimum.  But structurally, ALL the fixed income yields are grinding down lower since the Fed funds rate has grinder down lower.  Unless the credit bubble pops and raises market interest rates dramatically from distressed assets as everyone dumps bonds, we will see this lowering yield tied to the fed funds rate.

A lot of the below options are conservative defensive plays and suffer from additional bogeyman of sector rotation.  When the market swings wildly from risk-off to risk-on environment, everybody sells their defensive positions to buy equities as they did this September/October so munis/utes/preferreds took more than a few punches. But I'm there for the long-term, I have them holding down the fort while paying me.

First I decided to start with roughly half of my portfolio would be devoted to earning dividends in excess of 4%.  5% bank CDs of my youth, I hardly knew ye.   My allocations are in no way a recommendation but just illustrative of what I did to arrive at a particular solution.  After many months of studying fixed income from books, and contributors on Seeking Alpha,  I've made a much more conservative mix which is still higher risk than I am normally used to. The digram below shows my breakdown of income sectors and their expected yields.  

At the top level, my passive income buckets are allocated as per following with the percentages reflecting total of my portfolio.

• ~20% Munis - municipal bonds have lower credit risk than corporate and hence reflect a lower yield.  Given that regular munis yield less than 3%, even with the tax advantage, ~4% isn't  great. I use leveraged muni CEFs to juice the yield. Also taxable BABs(Build America Bonds) give higher rates so I hold them in retirement accounts.
• risks:  
• default risk - Muni defaults are historically lower than corporate and municipalities tend to restructure rather than default outright. However there is the scary overhang of trillions in unfunded pension liabilities unique to municipal debt. The question for the conservative investor is what is the runway we have left?  More than a year certainly and that is why we're not discussing this constantly in the same way we don't talk about our trillion dollar deficit.
• usual interest rate risk as mentioned above
• declining yield, distribution cuts on call risk. These funds hold the older 30-year juicy 5+% bonds which are slowing being called. The replacement muni bonds are very low yield currently so the distributions are grinding down slowly as with all the rest of fixed income options 
• ~8% REITs - Some advisors recommend considering one's home if owned as part of your real estate allocation but I strongly disagree. REITs are a diverse sector reflecting all aspects of the economy beyond residential- industrial, health, gov't, agricultural, retail, hotels, prisons, etc. No retail no prisons for me though.
• risks: interest rate, sector rotation, sensitivity to economic cycle pending subsection
• ~8% Infrastructure, Utilities - strictly from a sector point of view, municipal bonds tend to be already heavy weight utilities/transportation infrastructure- airports, bridge and turnpike authorities, water and power generation. So why add more to my already overweight municipal exposure?  Infrastructure containing the utilities sector is more and more considered a separate asset class in the same level as REITs although there is overlap since many industrial REITs such as cell tower REITs are considered infrastructure as well.  It's a steady income generating sector that provides highly useful services to society. What's there not to like more of...
• risks: overvaluation - there is a serious unsustainable ute bubble, sector rotation
• ~10% Preferreds - combination funds and individual issues. Unfortunately because of the rate cuts, even the lowest investment grade BBB- issues are coming in at or below 4.75%
• risks: 
• interest rate risk
• call risk- this is a problem for funds and has been reflected in the lower prices recently
• dividend suspension risk - Companies have to cut dividends on common before cutting preferreds so there is one level of cushion. For instance, JP Morgan cutting their dividends on the common stock would be a big deal and they did not cut payment to preferreds during the '08 crisis.  Keeping higher quality companies defrays this problem.
• ~2% High yielding (not necessarily junk) blended funds- this is my experimental batch geared to increase my risk tolerance

My concrete investment selections have been tucked away here.

So I increased my passive dividend income by 300% this year and 400% next year which makes me mad at my negligence that I did not take fixed income seriously. I could have easily easily paid off my mortgage with such income. And years past you could have gotten a 7% yielding JP Morgan Chase preferred stock.

Questions you may have: 

• Why no consumer staples? B/c McDonalds/Coke/Pepsi not healthy for human bodies and Walmart no good for employees or small local businesses. 
• Why no DGI dividend equities? They were extremely crowded trades except for big oil. I had a few dividend ETFs which I sold but will get back into.
• Why pay so much in fees?  Well if you pay low fees but get 3% dividend and higher fees for 4.5% dividend on a muni fund, the fees IMHO are worth it.  Yes this is based on leverage.
• Why no individual equities or REITs? To much research work, looking at a few right now.
• Why no emerging market dividends or debt? If BBN(with 75% "A" or better rating, 16.5%BBB, 7% junk)  is giving me 6% same as DVYE, the risk premium on EM is questionable.  Also I've been burned by emerging markets before.
• Why no TLT or EDV? I missed the boat and long duration treasury funds are just too volatile for me right now.
• Why no baby bonds? Still researching them.
• Why no BDC? Too risky for me in late cycle.
• Why no CLO? Won't touch that. If you're asking, you haven't read this blog...
• Why no MLP? I have some minor exposure to natural gas in my infrastructure funds.

Diversifying Diversification in Investing

Who hasn't heard the diversification mantra countless times from financial advisors to mitigate great swath of risks? Even if you grew up with your elders telling you not to put all your eggs in one basket, continue reading on dear reader. Yes yes it's good to diversify but it's not prescriptive on it's own.  What are the categories and how much of each?  Also the 2008 crisis showed us that stock/bond diversification gave you a false sense of safety as almost all market assets declined severely albeit some less than others.   Diversification itself has many faces and all is not as straight forward as it seems.  The below is not financial advice but an exploration of the different ways I looked into diversifying or intensifying beyond the usual asset classes. As the post is long, I've summarized the different factors of diversification below and some of the topics were so unwieldy as to merit their own posts.

• time - DCA vs lump sum investing
• risks - choosing among the most palatable dangers
• asset classes - equities, bonds, cash equivalents, real estate, commodities
• investment vehicles - preferreds, ETFs vs CEFs vs Mutual Funds, derivatives
• investment strategies - passive vs active vs smart beta, income vs growth vs value vs DGI
• sectors
• capitalizations
• geographies
• tax handling
• financial information diet- traditional vs crowdsourced 

Time Diversification

Time is the most essential ingredient in investing, something late starters like myself come to realize keenly.  Not only the time to dollar cost average into positions but time to rise or recover from losses.  I cover the vagaries of not having time in this separate post.

Risk Diversification

I heard on a podcast that risk cannot be destroyed, only be transmuted.  When I first moved out to the Bay Area, all my East Coast peoples would say to me- "I could never live in California. Earthquakes you know".   They probably saw the same ABC drama about a guy who got his legs cut off on the Bay Bridge on the lower deck during the '89 Loma Prieta Earthquake. I have to admit I sometimes would think of that scene when returning home to the East Bay from San Francisco. But the East Coast is rife with regular weather risks- hurricanes, extreme heat, snow storms.

As seen in my exploration of risks, there are a great many sure things coming our way- some unavoidably cyclical risks such as recession and end of a credit cycle and others secular like unfavorable shrinking demographics.  You can't have zero risk, just pick the most palatable ones you can live with. Being in cash just exposes you to devaluation/inflation risk.  I want to be exposed to different types of risks(interest rate risks/market risks) and reduce the scariest risks such as corporate credit bubble.  I also thought it prudent at this this year to lower beta risk and growth stocks.

Asset Class & Investment Vehicle Diversification

2008 showed us that traditional asset class diversification did not protect you entirely from heavy losses as stocks, bonds, real estate all crashed simultaneously and spectacularly.  Non mortgage bonds did drop ~20%(which counts as a large loss in my book) but a drop far less than 50% drop of equities. One asset vehicle I haven't used until this year is preferred stocks which provides higher dividends at a more stable price. As mentioned in my risks article, I don't use volatility or traditional measures of risk to allocate stocks vs bonds.

Asset Classes:
Financial literature claims asset allocation determines majority of returns.  This makes life easier as one does not have to agonize over stock picking. Of course the pain is determining to what ratio one holds these asset classes as appropriate to one's life situation. There has been talk of the death of the 60/40 balanced portfolio in this low interest environment. 

• equities - Growth stocks have dominated the market in the last decades and the conventional wisdom is that to really grow your money you have to invest in the equity market.
• I hold equities that are bond proxies like utilities or preferreds.
• fixed income/bonds - Fixed income markets are more diverse, complex and larger than the equities market. I've shifted overweight to fixed income early this year as explained in this post.
• cash equivalents
• real estate/REITs - I've increased allocation to 15% as REITs are a steady income producer
• commodities- this is the first time in my life I've added commodities as 3% allocation after reading and listening to Ray Dalio's arguments for holding this asset class. 
• gold & silver - This is the first time in my life I started a tiny position in gold and silver.
• cryptocurrency - I diverted my boba and lotto ticket money here.

Investment Vehicles/Instruments:
An investment vehicle is the concrete financial product type that holds assets in one asset class or span multiple asset classes.  Except for preferred stocks, I don't choose the investment first based on vehicle type since returns tend to be largely driven by the underlying asset class.  Instead asset class/sector selection comes first and then figuring out the best ways to gain exposure.  

• stocks - currently I don't hold individual companies and opt for passive and active funds as I don't want to deal with the idiosyncratic risk.
• preferred stocks - a good income producing vehicle that bridge bonds and equities.  I hold individual preferred shares as well as general and sector preferred funds for diversity.
• ETFs - passive index ETFs is the mindless way I pump money into equities.
• mutual funds - currently avoiding due to lack of liquidity and higher fees compared to ETFs
• CEFs/close end funds - currently the main income generators of my portfolio
• derivatives 
• currently I don't use them directly though I hold some funds that generate income with a covered call options strategy

For instance for my REIT exposure, I use a spectrum of vehicles mostly to learn about the sector. 

• ETF- VNQ, the default Vanguard option
• CEFs - RQI, JRI
• individual REIT preferred shares
• REIT preferred CEF fund - RNP
• individual stocks for mREITs

Could I have gotten away with just one ETF? Sure, I only had VNQ for a number of years which is a common and simplest way a lot of investors gain exposure to REITs.  I am trying a number of vehicles mostly to learn about the sector and CEFs due to their leverage have incredibly juicy yields. 

Asset Management Strategy Diversification

Active vs Passive vs Smart Beta Management 

The world has turned majority passive and simple portfolios built on a handful of passive ETFs have done extremely well in the last 15 years.  I however don't believe in putting all eggs in 1 strategy basket- also most cap weighted passive funds whether the investor knows it or not are using a momentum strategy which may have paid out  in the last 15 years. But every strategy has it's day.  Most importantly not all corners of the market favor a passive strategy. 

• Favoring active management for munis and REITs. Munis and REITs are a fragmented inconsistent market making passive less efficient. 
• Passive is okay if the fund has a decent dividend over 4% like VNQ so you can compound your returns
• Smart Beta hasn't beaten Passive Indexing because the last bull market in the last 10 years favored momentum investing style inherent in cap-weighted passive funds. I may reconsider adding back Smart Beta.

Income vs Value vs DGI vs Growth

1. favoring income right now in a expected sideways market which means I have a lot of closed end funds which give higher dividends due to leverage which I find the risk tolerable in a rate lowering environment 
2. value investing of the Warren Buffet/Charlie Munger school is always a reasonable choice but I don't have a sufficient process yet to recognize value traps. Judging by HeinzKraft, even Buffet gets it wrong.
3. dividend growth income/DGI- I haven't favored DGI right now as most desirable DGI stocks are overvalued. 
4. growth- still scouring for growth opportunities in future areas like battery technology, 5G,  cannabis(waiting for bottoming)

Geographic Diversification or NOT

This is a bone of contention for me as even Warren Buffet said investing in U.S. alone was sufficient due to multi-national nature of American companies.  For certain, I could have had better returns never investing outside of U.S. listed assets as Developed Market and Emerging Market indices and attendant ETFs have severely underperformed in the last 10 years compared to the U.S. markets. And as everybody repeats that the U.S. is the cleanest dirty shirt in the pile.

• Underweight Developed Markets
• Europe.  European Central Bank has less ammunition for fixing problems given negative interest rates, the special structure of the eurozone-i.e. individual nations can't print their way out of debt crisis like the U.S. can.  But the ailing national banks are a concern. If Germany the strongest of the EU has banking problems, you should pay attention. You only have to look at Deutsche Bank stock DB and index for European banks - Eurostox 7 SX72  looks dreadful as it's at a 30 year low, the current price is from 1988.   Other signs, perpetually problematic Italy was trying to print bonds in an alternative currency  in violation of EU agreements.
• UK- the British are kind of proud of their tradition of bumbling through chaos and that's the default hard Brexit scenario. There is a contrarian argument that British equities have been overly punished.
• North America- Canadian exposure 
• Japan - manufacturing recession 
• Korea - considered the canary in a coal mine is currently keeled over
• Underweight Emerging Markets- until I understand more.
• China - Cautious here. Massive over leverage at every level, China bank problems seem eerily reminiscent of U.S. banks in 2008 crisis. China manufacturing has slowed and Hong Kong conflicts are hard to resolve.  
• India- corporate tax cut always buoys the markets but I didn't bite.  Growth at a 6 year low with a lot of bad debts in their banking and shadow banking system.
• South America
• Argentina concerns of contagion. They've defaulted 8 times in 200 years. Current bond holders thought it's different this time.
• Brazil still volatile
• Keeping a watch on DVYE(7% yield). It has ~16% Russian exposure- I don't worry about the credit risk as Russia actually has healthier balance sheets than most DM nations but I'm not comfortable investing in a country that tried to disrupt our elections.
• Considering Frontier Markets as an EM substitute
• FM is the common ETF in this space but the 3.8% dividend is not worth the risk at current valuation, better off holding a federal muni which yields 4.5+%.
• FM/EM is not great in a strong dollar environment.
• U.S. vs State vs local  Munis
• Hard to avoid the worst fiscal states of Illinois, New Jersey, Connecticut, Pennsylvania  in a national muni as all of them have some exposure. They tend to be higher grade debt such as Chicago O'Hare airport or New Jersey Turnpike Authority which will not default outright.  Muni debt defaults are rarer than corporate defaults and tend to restructure. 
• Overweight California munis - the state's economy is stronger than most so I have taken the risk

Sector Diversification

You can look at the Schwab asset performance quilt that performance is a jumble- it's not so easy to pick out goats from the heroes as every sector takes their turn. However this does not mean that you have to make a stack of peanut butter sandwiches and you can do a more tactical allocation.  It's not as if every sector has an equal opportunity to win the race- some sectors have well known handicaps.

Developed Markets- if you had to bet on a marathon runner and old man Europe is known to have a chronic cough from decades of smoking, a heart condition and an upcoming nasty divorce, well you don't have to bet a lot of money there.    Odds are not in your favor and the upside in the slim chance there is one is going to be small.  However if things go pear shaped...  It's not that I wan't to pick out the winners, I am more interested in limiting downside than capturing upside which means avoiding a few areas:

• corporate high yield - mostly a no go zone for me
• DM- Avoiding Europe except for infrastructure exposure as nothing good can come from so much negative interest rates.
• financials - preferring preferreds over common
• health- political risk 
• tech- you are forced to be overweight tech in the S&P500 or any large cap index due to apple, microsoft, netflix, Facebook, google which have disproportionate weighting so I don't invest specifically in tech

Capitalization Diversification

The market capitalization of an asset has different implications for individual stocks vs.  funds.  If I was investing in a specific company, I should choose the company based on the merits of the company's long-term prospects and not based on capitalization.  With funds, I want to be exposed to all capitalizations but again there is the matter of allocation.

• mega-cap($200+ billion)
• large-cap ($8.2-$200 billion)   
• mid-cap ($2-$8.2 billion)
• small-cap($250 mil-$2 billion): small-caps tending to be domestic are more impacted by an economic cycle and have less resources to recover. Russell 2000 was markedly slower to recover since the 2018 downdraft.
• micro-cap(<$250mil) - so thinly traded, these are highly volatile

If using a passive index fund strategy, for the equity portion, is it better to use specific buckets of different caps or just a simple total market index?  You can point to outperformance or underperformance of large cap S&P 500(SPY,VOO) and total market funds(VTI) cherry picking time periods. Since S&P 500 tends to be about 80% of the total market, they are highly correlated.  In the past, I've mindlessly split equally between S&P 500 and total market and is good enough for me as it's the overall allocation to equities that matters more.

"Smart money" obviously allocates capitalizations based on business cycle and keeps all those macro-economists employed. The current tail end of an economic cycle is not a good time to be in all capitalization categories. I've heard over and over from on CNBC that smaller companies are less able to withstand a downturn and are exposed to credit risk as they have levered up significantly in this cheap money environment. But I need to dig up more data and consider if it's worth tweaking a specific strategy.

 In closed-end funds, capitalization plays an outsized role in liquidity and daily volatility and smaller cap funds have better arbitrage opportunities as they sometimes go on brief sales unrelated to specific news.

Tax Diversification

• Save in different types of taxable and non-taxable accounts. I have 3 types of retirement accounts Roth/Traditional/401K Solo that I optimize for the year.
• Employing taxable munis(in non-taxable accounts) and non-taxable Munis everywhere

Fund sponsor diversification

More relevant with CEFs/muni funds due to sponsors tending to pool dividend cuts so I rotate between Blackrock/Nuveen/Pimco/Eaton Vance pending z-scores/coverage ratios/call risk/and other factors. In choosing passive ETFs, there are slight differences in expense ratios and drift but plenty of investors had huge success sticking only to passive Vanguard ETFs.

Diversification vs Intensification

There is a skinny contrarian argument that can be made for intensification since diversification dilutes the downside as well as the upside. Some level of intensification can work for people who have a deep expertise. I could have bought 4 houses on the cheap 20 years ago and  handily exceeded all the stock market indices.

Diversifying Financial Information Diet

Investing is about acting on knowledge and being informed and so it's important to get diversification in "how" you know. I try to ingest a varied diet as possible. I don't have to agree with most of the financial pundits out there but it's supremely useful to constantly challenge my entrenched biases. I take a steady diet from these sources:

• traditional and new media for daily feed 
• old wall: WSJ, Bloomberg - left and the right to balance out
• new: cnbc, yahoo financial
• public: NPR Marketplace 
• crowdsourced
• seeking alpha - the first place I look before making an investment decision as the nature of crowd-sourcing ensures I get a wide spectrum of diverse opinions. I would say seeking alpha was probably the single most useful in making concrete investment decisions for fixed income
• bogleheads forum - if you go here, you know what you're getting
• reddit
• industry experts/hedge fund managers/contrarian views
• real vision
• sell-side institutions - all the investment management firms provide education and publish market analysis  
• Fidelity - has a decent library of learning videos and also provide live webinars that anyone can register
• different formats
• books from different decades, Benjamin Graham(1949), Peter Lynch(1980s,90s) still useful reads.
• podcasts such as Adventures in Finance, Grant's Interest Rate Observer

Concluding Thoughts

After going through this analysis,  I realize time diversification is the most important and hardest to achieve.  I kick myself for not getting serious about investing earlier but better late than never. And given free trade commissions, it's easier than ever. At least I had some common sense about squirreling away acorns for the long winter which is half the battle. 

Wild and Woolly World of Bonds

Obviously fixed income vehicles like bonds with regular interest income payments are the easiest asset class to squeeze out a steady come. I read someone on SeekingAlpha say 

"Holding stocks, you are waiting for your horse to win the race whereas holding bonds your horse merely has to finish the race".

Ardennes warhorse superior to racing breeds for everyday

Although the above sentiment is not quite right in boom times as a rising tide lifts all boats (investing is full of conflicting cliches), race horse analogy does hold more water for the more challenging economic times.  I'm not going get too ambitious in a late cycle environment and rely more on fixed income. Also in the worst case, bond holders are paid before preferred stock before common- of course who knows what happens to Tesla bond holders if things do go belly up. I digress.

Bond and fixed income markets are even more diverse than the equity market and there are multiplicity of options to invest in the bond sector. I just know the basics to navigate and evaluate a bond fund with a surface understanding of the basic credit risk and duration risk that I picked up from investopedia.

Buying bonds directly(with the exception of treasuries and preferreds) in this interest lowering environment has been not worth the effort for me. For instance, new municipal bonds are less than 1.5% right now- BART released an insulting 1% 3 year bonds last week but I guess we should be grateful rates are not negative like most of Europe and Japan.  For ease of investing, liquidity and higher rates, I hold high quality bond ETFs and mixed bond CEFs. The advantage of muni bond funds with long durations is that they are hoarding those precious 30 year 5% interest bonds from that bygone era(a soft flute plays) and can payout much higher yields.  Obviously all munis funds have increasing call risk and will have to replace in this low interest rate environment.

 Bonds currently have the following pitfalls:

• bond bubble- yes, too many people have piled onto anything dishing out a yield
• even "safe" treasury backed bond ETFs carry significant price risk, see below chart
• higher yield can mean significantly higher risk without a risk premium to match.  Corporate high yield definitely is a no go zone for me.  5.3% for a corporate junk bonds (HYG, JNK)? No Thanks!  If my quality Muni CEFs are yielding 4.5%, is 80bp worth the leap in risk. Of course not. But even investment grade corporates IMHO carry a higher risk due to BBB downgrade risk.  A few junk bonds in Europe are starting to go zero which is madness.

OMG U.S. Treasuries?
Run up on TLT(2.4% yield on 20 Year Treasuries).
Safe bond fund bubble of unnatural proportion?

Firstly, low yield is NOT ALWAYS to be dismissed as you can hold bond funds for price appreciation as seen in this spectacular example.

TLT(twenty year treasury EFT with 2.23% yield) has had a dangerous run up but if rates go to zero as many hedge fund managers have predicted, can the rally last last longer?  An Austrian century bond paying 2% rose 60% in price this year.  This is where having the original treasury is significantly lowers risk as you will not lose money when you hold it to maturity.

I am currently in short term treasury ETFs and corporate ultra-shorts to park some of my money.

Where to find reasonable yield in a sub-2% fed interest rate environment without being forced too far out on the risk curve?  I've opted for holding Closed End Funds (CEFs) in the municipal space since they use leverage of upwards of 40% to increase yield and give 4+% dividends.   The leverage risk in a falling rate environment is more tolerable to me than trying to get yield elsewhere in corporate space.  I'll have to cover CEFs in another post as there is an art to buying when it goes on a sale and increases the discount.

What's this stock that recently beat the S&P 500 SPY in blue?
PCQ- California muni CEF again.
Sold it regretfully in April since it has an irrational 40% premium.

Here is my brief run down on the various bond categories:

• govt
• short-term  
• actual bonds from the Treasury - not purchasing any more short-term currently as the rates are not favorable compared to the ETFs/CEFs
• ETFs (VGSH,SHY) -  I use them for safely parking money and for their liquidity.  Definitely these have moderate run ups I'm cautious when adding any more.
• long-term ETFs(TLT) - there is currently a ferocious long duration treasury bubble so I am avoiding them
• floating rate(USFR) - bought them early in the year when interest rates were going up but I traded them after Jay Powell turned dovish. However I made the mistake of going into short-term instead of  transferring into long-term treasuries. Floating rate definitely not a good choice in a rate declining environment.
• TIPs - I'm on the fence on their effectiveness and they have always underperformed the other categories for me.
• municipal funds- currently my favored bond category of choice and will write more about them. Yes there is potential pension default risk looming but that steamroller is much slower moving and IMHO will arrive later than the other risks.
• national
• state - long California
• high-yield- junk munis are my guilty pleasure since muni junks have lower default rates than corporate. Also, most CEF munis always contain a percentage to boost earnings.  Blackrock recently voted in changes to allow for high yield muni in "Quality" rated muni funds so it may not be possible to avoid them.
• corporate 
• ultra-shorts (GSY, VCSH, NEAR,MINT,JPST) currently yield 2.5-2.8% which I use for parking money. Risk premium is definitely not enough to eke out less than 50bps and if there are further fed rate cuts reducing yield, I'll definitely dump these.
• high quality
• QLTA has only A rated bonds and it's now overvalued on my watchlist for next time
• investment-grade - currently avoiding unless ultra short due to looming triple BBB downgrade threat
• high-yield- a no-go zone
• senior loans/floating rate loans - avoiding right now
• agency
• MBS(mortgage-backed-securities)- dipping a toe in, will update later

Bonds are a more complex space than equities and has a wide spectrum of risk to match.  However the interest rate/default/leverage risks I personally find to be tolerable in the municipal bond CEF space than holding defensive equities for dividends.

Dividends- Getting Paid to Hold

(Dripping Dividends and compounding  is core part of my risk management strategy.)

If you noticed, S&P 500 has not budged between Aug 2018 to Aug 2019.   We also had a lost decade between 2000 and 2012 while Japan has had 3 decades lost.  It's not inconceivable the U.S. markets will see another period of sideways action.

Overall profit even with a 12 year price loss.  PCQ was my favorite fund which
I sadly sold as PCQ is so overvalued right now. I so miss you PCQ.

What's this hot stock to beat the SPY S&P 500 during the lost decade? PCQ is a California muni fund.  You can see the actual stock price PCQ went down significantly from $22.69 to $15.05 in 12 years but overall came out much better than SPY due to its ~5-6% interest payments which reduces capital losses as a risk strategy.  Still $4000 in 12 years is terrible return but better than losing money and more than double the S&P return.    Of course you can win any argument cherry picking the dates, but income generating assets in a sideways markets has proven to me a better return than growth indices. The regular payments which if they are dripped are of critical importance as you get the virtuous double benefits of compounding and dollar cost averaging as the above chart amply shows. Actually you should have been lucky at all even to be in SPY as see Nasdaq ETF QQQ:

You might counter with- how about now! Surely tech has more than amply recovered no? Lets go with the trusty QQQ which I sadly have sworn off never to touch ever since the dot com bubble. What's wrong with the below chart. Is this even correct, hasn't Nasdaq has been in a 8-10 fold rise for 20 years? This totally can't be true... Well it is true if you bought at the top of 2000 which a lot of people including me did. It's still shocking to me that Intel never recovered their 2000 high price.

These charts while true do not match our assumptions that tech should have massively outperformed
just a California muni in the last 20 years.  Only when you don't compound the dividend, tech will win.
So the moral of the story is is DRIP.

You can see in the second chart that dripping is critical as $10K of PCQ returns come from  compounding and dollar cost averaging. The Nasdaq definitely was impossibly irrationally overvalued compared to the general market equities now.

I'm 110% my financial market assets will decline in the coming recession. If we have a side ways market which I am expecting, I absolutely want to get paid regularly and DRIP while waiting to bump by returns.

We alas are no longer in that bygone era where being in all cash at least gave you the comfort of 4% interest in safe investments like CD and treasuries so you have widen your field considerably. I never in my life thought I'd be looking at MLPs and BDCs but I didn't think we would have low interest rates for so long and given negative interest rates in Europe, I should definitely be prepared to see lower rates for longer.

Currently, these are the currently accessible income generating assets in the financial markets with my preferred vehicles in green:

• bond funds  - Currently overweight. See full post on Wild and Wooly World of Bonds
• govt - beware of bond bubble in treasuries
• municipal - overweight due to usefulness to society. some high yield tolerable
• corporate - favor high quality and ultrashort duration
• agency- some MBS
• preferred stocks- Relevant for non-growth era for high yield and more stable stock price. I currently hold individual preferred shares which sometimes can be bought at favorable price at the IPO as well as CEFs.
• dividend generating equities/funds
• closed end funds- CEFs which cover all areas mutual funds cover tend to payout high dividends due to use of leverage up to 40%. So a muni CEF can pay 1.4X higher return than a mutual muni fund.
• hybrid vehicles- mixing equities, bonds, derivatives to hedge risk
• REITS- attractive dividends. This space is diverse and some sectors are at a discount. I will be filling in detailed posts on REITs later.
• utilities & infrastructure-  currently adding phase, it's overvalued so I have them on watchlist before adding more 
• MLPs - It's been a disastrous 5 years since the fracking boom and bust. Being a carbon polluting investment, it should be off my list.
• BDCs- Still studying, but weary of higher risk 

Above the 3, I am currently overweight municipal bonds, preferred, REITs, and infrastructure utilities.  In this post I just wanted to show readers the benefits of dividends even while the underlying asset is declining severely as a risk management strategy.  I will be filling in detailed posts on REITs later.

Risks- Part I Systemic Risks to Scare Any Human Being

Because flipping has a $300 fee plus repair charges,
I drove this real world dune buggy like a driving test for the DMV.

The absolute joy and fun of a single player game is that one can take the craziest risks because you can most often reload a previous save or start over.*  Dying and resurrecting is the most common game play loop unless you masochistically play on permadeath mode where one careless move is game over.

Back in the real world of money, when you lose, you definitely do not get a redo on the loss. You do get more chances to lose(or win) more money if you have capital leftover or new money to plough.  However for me the feeling of losing big chunks of money was so terrible in the dot com bubble that I haven't risked too much.  And if you haven't lost big chunks of real world money before- you don't know exactly how you will react emotionally.  Most humans will inopportunely panic sell accordingly to the studies.

Before you start constructing your portfolio, there is a tricky sticky balancing act between greed and fear. There is a conceit in Modern Portfolio Theory(MPT) that one can neatly determine how much of a return do you want and how much risk you are willing to bear to get it via a classic stock/bond split.  Behold the classic balanced portfolio of 60% stocks/40% bonds.  For me, this is the WRONG WRONG WRONG way to think about risk management because:

1. Equities can be much higher risk than people cognitively realize, the 60/40 split could be 90% risk from stocks  and 10% risk from bonds as recognized in Risk Parity but more on that later.
2. Both bonds and stocks are an incredibly diverse asset class with a wide overlapping spectrum of risk. E.g. you can have utility stocks(bond proxies) that are safer than high yield bonds.  REIT subsectors behave as diverse as stocks and bonds. Preferred stocks act more like bonds.
3. Risks for a specific asset class do NOT remain static. Risks are heightened at different times in the economic cycle.  All bonds esp. gov't treasury bond funds are going through a crazy bubble right now.
4. Asset specific crises do occur. If there is a corporate credit crisis as warned by Merrill Lynch, investment grade bonds can tank more than equities.  Think back to 2008. The usually safe gov't mortgage backed security darling Fannie Mae- deemed  “the best business, literally, in America.”  by Peter Lynch long long ago-  tanked during the mortgage crisis. I picked up a few shares for a $1 having the good luck not to have bought in at $80. 
5. To hammer this in again, even low risk safe haven areas can have a bubble (bit redundant to point 3 and 4) and bubbles have a nasty habit of bursting.  Of course treasury and sovereign bubbles never get as large as equity bubbles but you don't expect to lose 40% in a treasury ETF and if you had the underlying bond, you can hold to maturity.
6. Most investors for their bond allocation do not buy the actual underlying bond but buy bond funds for ease and liquidity.  401K accounts force you to buy a bond fund and funds have bubble risk different from holding bonds to maturity.

So I try to construct my portfolio in terms of risk I can personally tolerate instead of asset class and different from the standard risk parity model which relies on leverage.  Before I can assess what the risk of any specific asset I intend to hold,  I spent months trying to get a handle on all the terrible things that could happen in order not to scare myself but to make more informed decisions about which risks impact which asset classes and picking among the risks I can tolerate.  I think we are most afraid when we know the least. When I was constructing the below list, so much is intertwined and a crisis may emerge not because one domino falls but multiple negative situations amplify one another.  Here is my growing list of terrors:

Currently Known Systematic and Structural Risks to Cause Declines in Asset Value

1. Economic cycle risk (inevitable and near)- economies are known to grow and shrink in mechanically understood cycles and it's consensus we are at the end of a historic economic boom - the likes of which the world has not seen.   We should accept the dao of economic cycles. 
• Overvaluation/bubble risk - everything that rises must also fall. Ironically, there are currently ample number of equities that are not overvalued and at multi-year lows, but  many of the safer bonds are at all time highs as the bond rally has been ferocious.
2. Credit risk(scary)- We are in the MOST leveraged condition since the invention of money. Too much debt at all levels:
1. corporate debt (in my top concerns)
• The biggest fear is the BBB downgrade that may follow after a recession. You can read in excruciating detail the Morgan Stanley report too cutely titled Nature of the BBBeast. 
• Is it not madness that corporations would borrow money to buy back stocks to artificially inflate stock prices instead of paying back their real debt?
• Ironically low underwriting standards may be keeping the bond market "stable" as more lower quality bonds would have defaulted in prior stricter eras causing havoc.
2. bank debt - are ailing European banks dragging around bad debt more problematic than massively over-leveraged Chinese banks dragging around bad debt? Who will keel over first if government intervention isn't enough?
3. gov't debt
• sovereign debt 
• Many countries(U.S., Europe are at record debt to gdp ratios including the U.S.) U.S. spent 8% in interest payments in 2018, and it's the upward rate of change that is scary (7% in 2017).  However one can console oneself that a good chunk of that goes to Social Security.
• Ironically, Russia has a cleaner bill of health- $0.5 trillion in debt and roughly the same in foreign currency reserves of which a significant portion is in gold.
• Lucky for Europe, a lot if their bonds are negative yielding.
• growing deficits - trillion dollars used to mean something. Can the U.S. get away with printing trillions indefinitely?  
• state/local government debt - The states with the worst fiscal situation is New Jersey, Illinois, Connecticut have structural deficits.
4. consumer debt
1. education debt - boggles the mind there is $1.5+ trillion in U.S. alone.
2. auto debt - $1.25 trillion with rising defaults
3. credit card debt
3. Geopolitical/political risk
• trade tensions, tariffs
• U.S. and China
• U.S. against everybody even allies- Europe, Canada, Mexico, India, Brazil 
• China punishing Canada for handing over Huawei executive.
• China still punishing Korea for U.S. THAAD missile. 
• Korea and Japan in a serious confrontation depriving materials for Korean semiconductor business. 
• European weakness.  European Central Bank has less ammunition for fixing problems given negative interest rates and the self-limiting structure of the EU. But the ailing national banks are a concern.  Germany the strongest of the EU has banking problems while Italy was trying to print bonds in an alternative currency  in violation of EU agreements. You only look at Deutsche Bank stock DB hovering below $7, if it drops under $5, there's a lot of institutional investors that will have to sell. You can see the index for European banks - Eurostox 7 SX72  looks dreadful as it's at a 30 year low, the current price is from 1988.
• UK- the British tend to be proud of their tradition of bumbling through chaos and that's currently the default- a hard Brexit scenario with Boris Johnson at the helm.
• China-slowing growth, Hong Kong conflicts
• South America- Argentina potential for future default with some concerns of contagion
• income inequality,  political fracturing, rise of populism and nationalism
4. Central Bank Ineffectiveness Risk
• Central Banks in Europe and U.S. used a lot of their arsenal since the 2008 crisis.  Europe is at negative interest rates. U.S. is at least at 2%. Both have had massive quantitative easing for a decade. More stimulus after extreme periods of stimulus are not as effective as shown by Japan.
5. Market & Volatility & Liquidity Risk  
• Beta risk- Currently being at the long long bull market, most stocks will fall when the general markets fall. Even if you invest in a solid business with a good cash flow, it tends to fall and rise with the markets unless there is remarkable developments. Utilities/REITs/consumer staples have lower beta risk although they too will fall in a severe market downturn.
• Volatility-volatility has increased alarmingly in the last quarter with wide market swings, exacerbated by bot trading. Volatility is dangerous for the overall market esp. on the downside as it can trigger protective stop loss or stop-limit orders causing a cascade.
• Liquidity Risk
• Some ETFs have a market liquidity that the underlying assets do not. The most obvious example is high yield corp bond ETFs like HYG/JNK which can normally be bought and sold with high liquidity but the underlying corporate junk bond market is not really liquid. High Yield is $1.25 trillion market but just avoid this junk sector.
• Some funds with small market capitalization (esp. Muni CEFs) are traded thinly and so have a lot volatility that does not reflect fundamentals. But you can use this to your advantage.
6. Interest rate risk - well-known and understood cyclical risks above zero. Negative interest rates are not understood. See Howard Marks memo.
• bonds and REITs are sensitive to interest rates in either direction
• low interest rate environment has forced traditionally conservative investors like me further out on the risk spectrum to get yield.  I was really surprised to see Michigan Treasury bought 5 million shares of NLY stock last month(to add to their 18 million) to get that 12.5% yield. NLY is the riskiest bond based asset I own...
7. Dollar risk
• devaluation/inflation risk - I've seen first hand how rapidly the dollar buys less and less in the 10 years since '08 crisis and the multiple trillions of dollars pumped in for QEs. I'll write a deep post about this as experts say are heading in a "deflationary" environment.  However everything critical to human life- housing, healthcare,food is rising outrageously. The one bright area hands down where a dollar stretches further every year is in video games- a $60 of today is a quantum leap in value of yester year, and factoring in inflation, they're giving it away. (Actually Epic Games is giving away new games every two weeks in a bid to steal Steam customers.)
• currency risk 
• strong dollar risk- if the dollar gets too strong,  emerging market bonds denominated in dollars becomes higher risk
• reserve currency risk- the U.S. treasury market is strong since we are the de facto world currency. However China/Russia/Iran/Turkey are making deals in the yuan by passing the need for the dollar and demand for treasuries.
8. Demographic Risk (inevitable)
• Most nations are experiencing a massive boomer population retirement. The U.S. is based on a consumer economy and retirees tend to spend less. If the wealthiest bulge of the population reduces consumption and will further do so in an imminent recession,  we might see a deflationary cycle that is hard to break. Japan has been trying for 3 decades.
• If we have a severe market downturn (35%), will the boomers take money out of the market in a bid to staunch the bleeding and preserve what they have left and not get back into the markets? Boomers hold the greatest percentage of wealth, reducing buyers of equities overall would be another downward pressure.
• U.S. entitlement programs Social Security and Medicaid are predicated on a growing population and are now at increasing risk. See next. 
9. Pension crisis risk (so scary no one talks too much about it)- U.S. federal/state/local gov'ts, universities, and many institutions providing pension plans have serious shortfalls in their pension funding.  The gap is estimated in the trillions and can widen during a recession. There are some deleterious knock on effects
1. Higher tuition costs- universities have to payout extremely generous pension plans which take an increasingly higher portion of the budget.  Just keeps on adding to the education debt crisis.
2. City revenue diverted from necessary infrastructure spending to cover pension payments

Wait but there's more!

Classic alien invasion in SimCity 2004. This game was so ahead of it's time.

Non-Systematic Risks and Other Dangers

• Environmental Risk  (real and rising)
• global warming
• increasing droughts that threaten water supply and food security which leads to political instability
• extreme temperatures, extreme storms, hurricanes 
• rising sea levels 
• Idiosyncratic Risks - something unique to that asset and can be diversified away
• hopefully one time company problem like a sexual harassment scandal or an E Coli outbreak 
• Boeing's 737 Max problems stem from an established trend of cutting costs in software development but they are in a unique vertical.  If people knew their plane's security systems was the work of subcontractors out of India that had no background in aviation being paid as low as $10/hour, they probably would avoid Boeing. Causing hundreds of deaths, there should have been more outrage and Boeings stock tanking much further. I think being included in numerous passive ETFs protected the Boeing stock.  
• Disruption risk- this is a slower moving beast that one can avoid/benefit by bein open-minded and paying attention to trends
• most shopping mall retail is getting killed by on-line retail
• streaming over cable/tv
• electrification- Oil sector has taken a hit not only because of shrinking demand but perception of the environmental ills of fossil fuels and their eventual demise.
• Exotic Cosmic/Geologic Risks - something I don't lose sleep over since there is such a low probability of happening but put here for completeness. 
• MSE (massive solar eruption) that damages our electricity grid. I guess bitcoin would be kaput as would be our modern financial system.
• Volcanic eruption
• (I'm not putting Impact Events/Comet even though they wiped out the dinosaurs since humans have way more on our plate.)
• Black Swan Risk - unknown unknowns that kill you. It wouldn't be the mortgage crisis since many keen observers were expecting a crisis and made quite a bag of money off their predictions.  Probably it was a black swan event for the granny who was clutching her Royal Bank of Scotland stocks- she would have never predicted her $200 a share stock would still be $4 after 10 years with zero hope of regaining her initial investment.

Given so many potential pitfalls plaguing the world economy, I'd better have at least the basis of a risk management strategy going forward in the increasingly volatile tail end of an economic cycle.   In the next post I'll cover what I am currently doing to mitigate some of the risk as I don't want to mindlessly plough in funds to passive index funds.  And strangely after this exercise, I felt pretty calm during this wild week of 800 dow points evaporating and reappearing.

(My risk management strategy summarized here.)

Making game saves expensive and precious with Saviour Snapps in Kingdom Come Deliverance.  Cost of 100 groschen is no laughing matter for a poor peasant boy.

* Not all games give you the freedom to save and reload willy nilly which players can abuse for a better outcome known as "save scumming". There are games that take a hardline against save scumming.  In Kingdom Come Deliverance, you can't save unless you sleep in your bed or a inn plus you have the option to drink a liquor called Savior Snapps which is prohibitively expensive to do too often and gives you a debuff.  Warhorse Studios took a huge risk in taking away the save button.  I was lost in the middle of the forest and traveling at night worrying about a bandit attack. I only had 2 Savior Snapps in my satchel that I was reserving for an emergency and it really heightened the survival intensity in a way I hadn't experienced in my other savable games.

Time Diversification

Over the long haul, we are all cosmic dust.

True time is something even the richest billionaires can not buy more of and youth have firmly on their side.  

Time is the essential ingredient in investing not only to dollar cost average into positions but time to benefit from the growth of the economy or to recover from losses. When you have less time to invest,  less time to compound growth is overshadowed by greater potential risk of not having enough time to recover from losses.  The brutal reality in today's market where the risk free rate is ~1.5%,  if one can't accept the potential significant drawdowns of the market due to a lack of time, one has to take less risk and accept lower returns.  As Howard Marks emphasizes,  the overvaluation of equity markets at all time high does not mean markets will go down tomorrow but the risks are elevated to do so.

Continuous investing with compounded dollar cost averaging(DCA) is THE critical strategy in any market including sideways and declining ones.   Achieving time diversification in building a portfolio is a big conundrum for those who have to invest a big amount in a short period of time.  As I am trying to thaw out my money from the permafrost of low bank rates starting in April of this year, I had to decide if I would put all the money to work right away(lump sum investing) or simulate some form of dollar cost averaging over the course of the year.  But I do not like false dichotomies if either or as the philosophy of diversification advises some measure of each.

• DCA vs lump sum investing - As we are at the end of an unnaturally long economic growth cycle sustained by gov't intervention of stimulus, low interest rates and corporate tax cuts, I found it prudent to start with dollar cost averaging with equities, but lump sum invest the safer bonds.
• More importantly, I needed to learn more before jumping into equity funds. In hindsight, had I put a large chunk of my money ~4/15 in VOO/VTI, I would have had a whole lot of heart burn and a daily thrashing of a loss/profit pendulum which may have made me retreat further into my bunker.
• This blog post explains the benefits of DCA over lump sum with DCA winning out because over time, U.S. markets historically tend to go up. Lucky us. (Not so for Japan and most European/South American countries).  However if we are hit with another lost decade(2000-2012), I'll be gray haired before I can declare victory with lump sum investing.  Dollar cost averaging wins for providing mental comfort.
• Dripping dividends are key since you will compound the continually investing returns.
• I could automate transferring a fixed amount into a no commission equity fund which I've been holding off currently. 
• I try not to churn more than 5-10% of my portfolio a day in buying  so I don't make any rash decisions that would impact the portfolio unduly.  However there were days of rare opportunity that I definitely missed.
• Patience vs itchy fingers- After hearing Warren Buffet is sitting on a $122 Billion hoard of cash,  I realized I should not hurry to deploy my cash. Waiting for opportunity has not been too terrible at 2.5% dividend yield which has been slowly shrinking to less than 2%.

This beautiful foyer is from the most excellent Skyrim mod Clockwork and has working hands that chime on the hour. This mansion is more impressive in VR than a flat image can convey.  The author must have devoted hundreds of hours to bring about this complex mod that has multiple dungeons that are more impressive than what Bethesda has created in the vanilla game.

Rethinking Gold and Bitcoin

There is currently a lot of binary thinking in gold and bitcoin. Outside of traders who will trade anything with monetary value,  either you get it or you don't.  There is great debate over whether they can act as a store of value.  I didn't get gold.  I thought gold bugs were a quaint class of investors  who were a holdover before the Nixon era- a dying breed being replaced by millennial bitcoin hodlers.  I have gold in minor jewelry,dental fillings, and in serious quantity in various video games but the thought of holding gold as a real-life investment was something I would NEVER consider until just last month.

Can't tell you where these gold bars came from....

After contemplating Ray Dalio's All Weather portfolio which recommends 7.5% gold and 7.5% precious metals, I started digesting some different viewpoints on Real Vision.  I read the full "In Gold We Trust" annual report.  In light of central banks loading up on this age old precious metal, I've dramatically flipped my thinking.  The light bulb went inside my head- the gold wouldn't necessarily be for citizens with a functioning currency to revert to. It was for nation states to give confidence to their currency without going back on a gold standard. The biggest use case playing out is China who is trying to unseat the dollar with the yuan. The Chinese have secretly amassed vast reserves of gold in the last few years and have only made it recently public. Russia started making oil contracts with China in yuan because theoretically they would be allowed to exchange the yuan at the Chinese gold window in Hong Kong.

I am a fiscal conservative and I firmly believe you can't print money the way the European and American central banks have been doing without serious consequences.  You can't crank out trillions of credit and debt continuously and NOT face serious devaluation.  Even in my lifetime, I've witnessed steep asset inflation (real estate and equities) and the continually eroding value of the dollar.  The increasing attack on the dollar confirms my life long belief on inevitable de-dollarization.

I listened to the audiobook version of Currency Wars written in 2011 and Jim Rickards was startlingly prescient predicting the Chinese and Russian attack on the dollar.  More unexpected news is attack from allies. Europeans recently launched  INSTEX so they can do business with Iran bypassing the dollar based SWIFT system. Seeing concrete evidence for attack of the dollar playing out, how does one hop to the conclusion that gold should be an anchoring investment in any portfolio as gold bugs advocate?   Gold has one main role and that is safeguarding purchasing power which historically it has done for centuries.  Had I had sufficient funds, I would buy second piece of real estate instead but instead have gold as an alternative.

So how should gold be represented in my holdings and how much of it. I thought it through

• real physical bullion - not practical for me
• paper gold - the most convenient and liquid
• gold ETF - suffers from counter party risk
• gold CEF - the most convenient option right now
• gold derivatives - too complicated
• gold miner funds - too volatile 

I had bought a thimbleful of paper gold and silver(PHYS/PSLV).  There is more paper gold (gold derivatives) than is above ground so I bought Sprott's CEFs to avert that potential danger.  I think I would start at 1% and at maximum hold 5% of gold and commodities combined (much less than recommended in Ray Dalio's portfolio).  The day I finished Currency Wars and decided to buy gold was 2 days into gold's recent run up which I hadn't been aware of.  In hindsight I could have bought with confidence. I was waiting for a correction which has not yet materialized.

If your grandma gave you the choice of a 30 year T-bill or an equivalent amount of gold to be bequeathed to you in 30 years time, which would you choose? Without a second thought I would go for the gold. How about equivalent amount of gold or bitcoin? Again I surprise myself by choosing gold.

Although gold has been used for centuries almost universally as a medium of value and exchange, Incan empire is one stark counterexample.  When I visited Cuzco decades prior, our professor told us Incans who had gold in abundance considered gold as a crafting metal for religious and ornamental use. Coricancha- a sacred temple in Cuzco- held life size fields of corn, llamas and other creatures crafted in gold- all callously smelted by the Spaniards.  It boggles the mind that the vast Incan empire operated without money or coins or written language. Accounting was recorded in knotted strings or quipu. Maybe in a thousand years, bitcoin and gold would be also considered such a curious footnote in history.

Gaming Personality vs Investing Style

Does one's gaming proclivities correlate to how one behaves as an investor? At first glance, how one gallops around Red Dead shooting O'Driscolls to steal their petty cash, whiskey and tobacco seems far, far removed from how one manages a tax-sheltered 401K account.  Are there raw personality traits underlying your gaming habits that shape the way you deal with money?  And can you take advantage of such insight to become a better investor?

To answer at least at a shallow level, I'm going to brandish that old trout, Bartle's taxonomy of player types.  This 23 year old classification of player preferences for multi-player gaming while crude is still a useful model to begin our analysis.

1. achiever - those who are motivated by mastery, leveling up, completion
2. explorer - those who delight in exploring the game world esp. glitches and breaking the game.
3. socializer - those who just wanna hang out with friends and others. Apparently socializers(90%) are the most numerous on this earth attesting to the booming MMO platforms like Fortnite and PUBG.
4. killer -  "To crush your enemies, see them driven before you, and to hear the lamentations of their women!" A good killer thrives on friendly competition and there is a smidgeon of competitive spirit in all gamers. On the dark side are griefers killing fun for everyone with their potty mouth and obnoxious attacks. Aha! Are shorters the griefers of the stock market? It's not evil to short TSLA.

Clearly not an achiever.  200 hours without progress is fine by me since I use FO4VR as a construction sim.  To be fair my modding blocks achievements- I wasn't motivated enough to put in achievement restore mod.

Understanding Bartle's classifications can shed light on what type of games you may enjoy.  As a kid, the first thing I would do when I started a new driving game was to try to veer off the road or bash into the other cars to see what happens; I wasn't as interested in playing the game as in breaking it.  Open world single player sandbox RPGs are my favorite type of game where you can noodle around without finishing the mainline quest, never bothering being the Dragonborn or finding Ciri or Shaun(**).  But a conventional successful investing strategy(dollar cost averaging of low cost index funds) requires a grindy disciplined approach.

Only in writing this post I realize my skewed explorer personality has been detrimental to investment since I lack discipline and interest in the core.  I am prone to going down rabbit holes since I find nuggets of knowledge to be the reward. Hence I got naturally attracted to alternative investing- p2p, crypto, and closed end funds.  Although I made some money in p2p and CEFs, (yes I lost money in crypto, some had to when billions vanished), in hindsight I should have spent my energies establishing my conventional market portfolio before dabbling in the peripheries.

I can see clearly I'd be a better investor with some harmonious sprinkling of achiever dust.  But how to force one's self to go down a path of achievements if not intrinsically motivated that way?   I will have to save this for a later post as I only have a small clue. Explorers are motivated by gleaning pragmatic working knowledge or exploring hidden parts of the world which will I have to use against myself to make progress.  Suggestions are welcome.

How about social aspects? Does being more sociable about investing lead to a more profitable outcome? That blade cuts both ways depending on who you socialize with and at worst can stoke foolish FOMO leading to bad trades.  How can you participate socially for a better investment outcome? Is it better not to mix friendship and money since potential investment losses could burden a friendship? So many questions to be examined.  Unfortunately Bartle's models center on player motivation and also don't reveal much about investor risk tolerance which we will have to revisit from a different gaming angle.

Definitely I lack a killer instinct and I'm perfectly happy with subpar returns if investments are in line with my skewed morals.  Competitiveness can be a dangerous combustible ingredient in personal investments esp. when FOMO is involved as seen in the Crypto bubble last year.

I thank you for joining me this far. Now time to go play.

** Okay okay, I did find Shaun in FO4VR only because I wanted to see the Institute and the synth fabricator in Fallout 4 VR made it totally worth it.  At first it's mesmerizing to see bones, nerves and skin being 3d printed and dipped in a red viscous vat to produce a fully functioning humanoid. But you realize that production of 2 humans per minute even at 8 hours a day means 960 synths a day and all of Fallout 4 food production can't support half that number. Math is always such an immersion killer.

Due Diligence - Time Investment for Investing Decisions

I've heard analyst Sven Carlin on youtube say it's not unusual for investors to have an hour long meeting with a financial advisor before handing over all their money they've spent a life time accruing.  It will be the most expensive hour of their life.   Since I made the firm decision to take charge of my own finances instead of paying someone else, I have to trade in serious chunks of my gaming time to burn brain cells for investment research, suss out risk and act on a decision, monitor and baby that decision and make more follow-on investment decisions.

How much due diligence is practically sufficient for investing decisions? Instinctively I sense one ought to err on the side of excess rather than skimp but what is that in terms of actual hours?  I've definitely know in my heart of hearts I've been grossly negligent.

 To motivate/shame myself into doing more, I started my list of "10 Ancillary Game Related Activities I've Spent more Time On than Actual Investing."  (I had to choose "Ancillary Activities" since I've played dozens of games for which any single playthrough or maybe just even inventory management in a single RPG would have wildly wildly exceeded my time investing. Sigh.)

1. Browsing the Steam Catalog esp. during Steam Sales- this is a form of true relaxation.
2. Modding Bethesda VR Games - Probably even one category- texture mods alone or just lighting/weather mods exceeds all my time investing. Did I tell you my 4K textures are simply glorious!!!  Weapons, tree bark, dragon skin, lady skin- you name it, I've enhanced it.
3. Performance Tuning Bethesda Games- Fallout 4 VR you are the worst time suck ever invented!
4. GPU/CPU/hardware selection- I've spent more time comparing TFLOP Specs than looking at P/E ratios.
5. Watching lore videos - to be fair, I do this while washing dishes or folding laundry.

At #5, I realized to my the horror that I could narrow my time neglect on investments even further.

8 Activities I've Spent more Time and Energy than on Any Single Investment Decision

1. Selecting PS4 Pro vs Xbox One X. PS4 Pro of course, you can't beat PS4 exclusive games.
2. Trying to get a complete set of Griffin School Witcher Gear. 
3. Figuring out which spouse to marry in Skyrim VR. Didn't end up marrying after all.
4. Horse care in Red Dead Redemption 2. For sure I've spent more time trying to spawn a Turkoman than any index fund selection.
5. Selecting and watching thermal paste videos, Kryonaut of course. Pea method is totally fine.
6. Overclocking just RAM and resetting BIOS. Overclocking is a unique kind of fun you can't get anywhere else!
7. Crop selection in Stardew Valley- Go for pumpkins! Pumpkin soup gives you 2 luck and 2 defense, a fantastic combo buff for Skull Cavern.
8. Remapping HOTAS X for Elite Dangerous

I could go on past 100.  To think I spent less time in selecting a robo-investing firm than my last GPU or console purchase should cause me some alarm.  Egads, I've probably spent more time agonizing over cheese selection than on some on my muni fund picks. But my grocery store sells artisan cheese chunks around $10, so it really is a serious decision impacting our family's entire week.  How can I make investing as fun as gaming, food shopping, or literally anything else I do in life....

So How Much Energy and Time Is Adequate for An Investment Decision?

I don't want to spend all my free time agonizing over investment decisions but I don't want to jeopardize retirement by my past slipshod approach.   Certainly the due diligence should correlate positively to the actual amount invested and risk involved.  To simplify, I merge both into one  and decide the hours should be some portion of how much money you stand to lose compared to how long it took you to save it.  If one stands to lose $1000 and if it takes 100 hours to save $1000(chosen for easy math), for 10%, 10 hours would not be so terrible. I just arbitrarily chose 10% but need to figure out a good minimum floor.  5% or 5 hours? Too bad such formulas aren't wholly useful but it's a way I use to convince myself that investment decisions that are taking longer to make should not be rushed.

Here are a few investment decisions I've been grappling with lately:

• Overall investment strategy and allocation - this impacts all the money so spending months even a year is warranted.
• Optimum place to park money while making decisions- While this impacts a big chunk of my stash, cash equivalents are considered relatively safe. I felt okay spending 4 hours choosing among treasury funds and ultrashort bonds.
• Whether or not to keep robo-investing and liquidate?  This one is difficult to determine since it's currently about underperformance and hypothetical earnings lost.
• Fund Selection - Selection of a specific funds in a chosen allocation bucket depends on the risk category where the above rule has been useful. Selecting a lower risk muni fund takes less than an hour.
• Crypto- I'm gambling with $200 for fun and education so even though this is through-the-roof risk part of my entire holdings, I spent a few enjoyable hours selecting coins.

I like many humans spend reams of energy on hugely inconsequential choices on a daily basis that could be rerouted to investment learning and decision making. I should not begrudge the hours needed to evaluate risk and understand the investment- I need to commit to invest in investment learning. Further more, decision making muscle is a limited resource that wears down as the day progresses, I need to prioritize investment decisions earlier in the day.  My worn out late night decision making muscles are only good for choosing a pajama set, late night snacks, and whether or not to go mining or fishing in Stardew Valley.